A Primer On ABIL Claims: Part I

• Published date: 21 October 2022
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax, Corporate Tax, Capital Gains Tax
• Law Firm: Miller Thomson LLP
• Author: Mr Bryant Frydberg and Evelyne Vacy-Lyle

What is an ABIL?

This article will be the first in a series of articles that discuss the Allowable Business Investment Loss ("ABIL"), including the interpretation of key terms as well as a discussion of recent case law.

Where a taxpayer's adjusted cost base ("ACB") of a debt to a creditor or of shares in a corporation is greater than the fair market value of the debt or the share, upon a disposition of the debt or shares a capital loss may be available. If a capital loss is available, the taxpayer may be able to claim an ABIL.

An ABIL claim is equal to 50% of the taxpayer's business investment loss. Generally, any unapplied portion of an ABIL becomes a non-capital loss that can be carried back 3 years and carried forward 10 years.

With the threat of a looming recession and interest rates on the rise, capital losses may become more prevalent. It is important to note that an ABIL claim may be audited by the Canada Revenue Agency ("CRA"). Therefore, it is important to understand the requirements for an ABIL claim.

Why an ABIL claim?

An ABIL is a type of capital loss with differing tax treatment from a typical capital loss. More generous tax treatments are given to an ABIL in order to encourage investors to invest in small business corporations ("SBC"). Unlike most capital losses, which can only be used to reduce taxable capital gains, an ABIL allows the loss to be deductible against all sources of income.

When can you claim ABIL?

An ABIL can be claimed under the following scenarios:

1. Actual disposition

An ABIL may be claimed when there is a capital loss arising from an actual disposition to an arm's length person of a share of the capital stock of a SBC.

An ABIL may also be claimed when there is an arm's length disposition of a debt owing to a taxpayer by a Canadian-controlled private corporation ("CCPC"). According to subparagraph 39(1)(c)(iv) of the Income tax Act (Canada) (the "Act"), in the case of debt, the debtor CCPC must be: (1) a SBC; (2) bankrupt at the time of being a SBC; or (3) an insolvent corporation that was a SBC at the time a winding-up order was made.

2. Deemed disposition

An ABIL may also may be claimed where a taxpayer elects in its tax return to have subsection 50(1) of the Act apply for that taxation year, such that the taxpayer is deemed to have disposed of the share or debt at the end of a taxation year for proceeds equal to nil and to have reacquired it immediately after the end of the year at a cost equal to nil.

In the case of...